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7/30/2011

The really, really bad GDP numbers

GDP grew by only 0.4 percent at an annual rate in the first quarter. The key here is to understand that GDP really didn't grow by 0.4% during the first quarter. It would only have grown at that rate if it had grown that way for over an entire year. GDP actually grew at 0.1%. That is as close to zero as one can get. The reason for the reduction in estimated GDP annualized growth from 1.9% down to 0.4% is basically for two reasons: business investment and net exports. Firms were apparently becoming very pessimistic about the future at the very beginning of this year. For the first half of 2011, GDP has grown by just 0.8%. Here is a useful discussion of the revision.

In June, the first quarter's growth in business investment was estimated to be $52.4 billion, annualized. Instead, economists now say it was just $16.4 billion. Investment in equipment and software was little changed, however. Home sales were also estimated pretty accurately.

The main reason why business investment was worse than we thought was due to inventories. Instead of growing at the annualized rate of $39.5 billion, they grew at the rate of just $10.8 billion. This indicates that firms weren't ramping up their inventories as rapidly as thought.

Due to this correction, instead of adding 1.5% to GDP, business investment added just 0.5%. So now we know where 1% of the growth went. . . .

The rest of the revision is mostly accounted for in the worse result of net exports. But really, it can be mostly isolated to imports. They were higher than we thought, which means that net exports were lower.

In particular, imports grew by an annualized $16.3 billion more than initially estimated. As a result, instead of adding about 0.14% to growth, net exports brought GDP down by 0.34%. Th revision to net exports cut growth by about another 0.5%. . . .

So what about the future? It can't be good that the Consumer Confidence Index is near its lowest level in two years. Rasmussen finds:

Just 13% of adult consumers say the U.S. economy is getting better these days, while 64% say it's getting worse. In the beginning of 2011, 30% said economic conditions in the country were getting better and only 45% said they were getting worse. . . .

The latest Rasmussen Reports national telephone survey shows that 36% of Likely U.S. Voters give the president good or excellent marks when it comes to the economy. But 50% say the president is doing a poor job, up seven points from 43% two weeks ago. . . .

The Obama administration adjustments to GDP have lowered GDP in 2008 and 2009 and raised it in 2010 (see Table 2A). Boy, isn't that a convenient result for the Obama administration while they redid these numbers? Previously, GDP growth in 2008 was equal to zero, and now it shows a drop of 0.3 percent.